NW Media Holdings Corp. v. IBT Media Inc.

• Decision Date: 28 December 2022
• Docket Number: Index No. 652344/2022,Motion Seq. No. 005
• Citation: 2022 NY Slip Op 34425 (U)
• Parties: NW MEDIA HOLDINGS CORP., NEWSWEEK LLC, NEWSWEEK DIGITAL LLC, NEWSWEEK MAGAZINE LLC, NEWSWEEK PUBLISHING LLC, N.W. DIGITAL LLC, N.W. MAGAZINE LLC, Plaintiff, v. IBT MEDIA INC., OLIVET UNIVERSITY, WORLD OLIVET ASSEMBLY, INC., ETIENNE UZAC, DAVID JANG, YOUNSEOK CHOI, Defendant.
• Court: New York Supreme Court

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2022 NY Slip Op 34425(U)

NW MEDIA HOLDINGS CORP., NEWSWEEK LLC, NEWSWEEK DIGITAL LLC, NEWSWEEK MAGAZINE LLC, NEWSWEEK PUBLISHING LLC, N.W. DIGITAL LLC, N.W. MAGAZINE LLC, Plaintiff, v. IBT MEDIA INC., OLIVET UNIVERSITY, WORLD OLIVET ASSEMBLY, INC., ETIENNE UZAC, DAVID JANG, YOUNSEOK CHOI, Defendant.

Index No. 652344/2022, Motion Seq. No. 005

Supreme Court, New York County

December 28, 2022

Unpublished Opinion

Motion Date 12/15/2022

PRESENT: HON. MELISSA A. CRANE Justice

DECISION + ORDER ON MOTION

HON MELISSA A. CRANE JUSTICE

The following e-filed documents, listed by NYSCEF document number (Motion 005) 70, 71, 72, 73, 74, 75, 76, 77, 86, 100, 101 102, 112, 118 were read on this motion to/for DISMISS.

This action is one of four interrelated cases in which former friends and business associates, Johnathan Davis and Dev Pragad, seek to gain the upper hand against one another over who controls Newsweek, a media brand.In this particular action, Pragad, as president of plaintiffN.W. Media Holdings Corp.("NW Media"), which owns Newsweek LLC and related entities, has caused N.W. Media to sue IBT Media, an entity that Davis controls.N.W. Media seeks indemnification for alleged losses under the Membership Interest Purchase Agreement dated December 13, 2018("Purchase Agreement").According to defendant IBT, "[t]his retaliatory lawsuit was orchestrated by Dev Pragad as a means to use N.W. Media's corporate assets to fund his personal vendetta against his former friend, Johnathan Davis, N.W Media's coowner, without corporate authority"(NYSCEF Doc. No. 71, p. 1).Defendant IBT argues Pragad should have brought this action derivatively.

This motion to dismiss centers around whether or not Pragad had authority to commence this direct action in the name of the corporation against IBT, as opposed to a derivative action.This motion is legally fascinating because there appear to be two distinct lines of cases that lead to opposite results.

Under the first line, heralded by Sterling Industries Inc v Ball Bearing Pen Corp, 298 NY 483(1949), the president would not have authority to initiate litigation.In Sterling, two groups controlled the plaintiff corporation on a 50/50 basis.A pen company, whose representatives comprised one of the groups, had agreed to make the plaintiff corporation the exclusive sales agent for the pen company's fountain pens for one year.The president of the plaintiff company called a special meeting of the board of directors to consider whether or not to sue the pen company for breach of contract.Two of the directors said yes.Naturally, the other two directors from the pen company said no.Thus, the board was deadlocked.

The Court of Appeals held that, where the by-laws of the corporation did not refer to the right of the president to commence litigation, but instead provided that the act of a majority of the board should constitute the act of the board, the authority of the president to commence litigation terminated "when a majority of the board of directors at the special meeting refused to sanction it."(Id. at 490)In so holding, the court reasoned that absent legislative action, the intention of the parties controls:

"The circumstances of the organization of plaintiff corporation indicate that the parties intended that the corporation should be managed by its board of directors and that the board should take no affirmative action if not sanctioned by a majority.That is the arrangement the parties intended and there is no basis on which to hold such an arrangement illegal.Had the Legislature intended to eliminate the problem of a deadlock it could have done so by the simple expedient of requiring an odd number of directors.Instead, apparently realizing the desire for equal control in some closely held corporations, it has continued to permit the election of a board of directors with an even number of directors.The fact that a deadlock may result does not necessarily mean that the present law is inadequate and that it should be remedied by the approval of presidential power where none in fact exists thus disregarding fundamental rules of agency law."

(Sterlingat 491-92;see alsoCORMktg. &Sales, Inc. v. Greyhawk Corp., 994 F.Supp. 437, 441[W.D.N.Y.1998]).^[1]

Nevertheless, the Court of Appeals did not leave the Sterlingplaintiff without a remedy.It noted the availability of a derivative action (Id. at 493).

Cases following Sterling cement the concept that, where the by-laws do not overtly give the president the right to commence litigation, and there is board or shareholder deadlock about the propriety of doing so, the president then lacks the authority to bring an action directly in the name of the corporation.For example, Crane, A.G., v 206 West 41st Street Hotel Assoc LP,87 A.D.3d 174[1st Dep't2011] involved a fight among shareholders about whether or not to defend a foreclosure action.The stockholder's agreement specified that any action of the board required unanimous approval of the directors and that any action of the stockholders themselves required unanimous approval (id. at 176).The defendant company was owned 50/50 between two additional LLCs.Separate individuals owned these additional LLCs.The individual who owned one of the 50/50 owners of the defendant also owned the plaintiff/lender.When the lender sought to foreclose on property, the 50/50 board of course deadlocked on whether or not to defend the action.

Relying on Sterling, the Appellate Division, First Department held that the general partner of the other LLC/president, who had wanted to defend against the foreclosure, had no authority to do so.In reaching this conclusion, the court noted that the president could not act against the wishes of his co-owner when the agreement between the two required unanimous approval (id. at 178) and that the president's "actual authority to defend the foreclosure action was terminated when the stockholders refused unanimously to sanction it"(id.) As in Sterling, the Appellate Division majority in Crane noted the availability of a derivative suit for breach of fiduciary duty should the failure to defend the foreclosure have been improper (id. at 179).

Other cases have similarly applied Sterling.In particular, in Stone v Frederick, 245 A.D.2d 742(3d Dep't1997), Stone, a 50% owner sued Frederick, the other 50% owner, in an attempt to take over the company.In dismissing the case, the court held "where there are only two stockholders each with a 50% share, an action cannot be maintained in the name of the corporation by one stockholder against the other with an equal interest and degree of control over corporate affairs; the proper remedy is a stockholder's derivative action"(id. at 745;see also, Giaimo v EGA Associates, 68 A.D.3d 523, 524[1st Dep't2009]["[a]s the president of a closely held corporation, Edward lacked the authority to act unilaterally against Robert's interest"]).

By contrast, nearly a decade after Sterling, in Paloma Frocks, Inc. v Shamokin Sportswear Corp., 3 N.Y.2d 572[1958], the Court of Appeals seemingly cut back on Sterling's holding.In Paloma, the motion on appeal was for a stay of arbitration.The Court held that, because the corporate president of defendant Shamokin had authority to execute the underlying contract containing an arbitration clause, the president also could initiate arbitration under that contract (Id. At 575).

Years earlier, Paloma had entered a contract with defendant Shamokin whereby Shamokin was to help Paloma manufacture dresses.Shamokin contended that Paloma owed it for services under the contract containing the arbitration clause.

Paloma's president, Harry Toffel, also owned ½ of Shamokin.Paloma, through Toffel, countered with a proceeding to stay arbitration.Bernstein, Shamokin's president, admitted that the Shamokin directors had not acted in the matter and that a meeting of Shamokin's board would have been an 'idle gesture' because the Toffel side, which controlled 50% of Shamokin, as well as owning Paloma, would never have voted in favor of Shamokin suing Paloma.

The Court of Appeals held that Bernstein, as president of Shamokin, had the presumptive authority to commence arbitration.The Court of Appeals reasoned first that there had been no direct prohibition from the board of directors.More importantly, the Court reasoned that, because all the directors had previously agreed to the contract containing the arbitration clause, they had already agreed in advance that "Paloma-Shamokin controversies would go to arbitrators."(Id. At 575).All Bernstein was doing was carrying out a previously agreed arrangement (Id.["[a]uthorization of a corporation president to agree to a general arbitration clause amounts to an authorization to the president to carry on an arbitration of such disputes as may arise"]).The Court specifically noted that "We do not suggest that the board of directors could not forbid a particular arbitration, but there was no prohibition here"(id.).The decision did not address whether the arbitration should have been brought as a derivative action or whether the arbitrators could have dealt with the derivative/direct issue.

The Paloma court mentioned another case from the year prior, Rothman &Schneider v Beckerman, 2 N.Y.2d 493(1957).In that case, Rothman was the nominal president of the plaintiff corporation, who also held half the stock and half the board seats.Schneider was the secretarytreasurer, who effectively held the other half of the stock and the other half of the board seats.By agreement when Rothman retired, Schneider assumed the responsibilities of president.Later, Schneider sued Beckerman, Rothman's son-in-law, for unfair competition.After the lawsuit was...